Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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How to Plan for Future Costs and Revenues at a Distance

In an earlier section, we discussed how to predict the leads and lags of revenue and expenses in future healthcare. Some approaches were suggested, but they were for a strictly defined, short-term program. We now must turn to future adventures in new directions, where it quickly emerges it is impossible to predict ahead several decades precisely if even the setting of goals must await Congressional decision. For example, we have it from statisticians that the average lifetime cost of healthcare is approximately $300,000 per person, somewhat more for females than males. That figure, however, is based on the assumption that present trend lines will continue when we can be pretty certain some expensive diseases will be cured, and some cures may even be more expensive than the disease. Diabetes has so far proved to be one such disease. Instead of dying in a few months, diabetics now give themselves injections and pumps for fifty years. It is now the turn of diabetes to be regarded as an expensive disease, a cure for which might possibly save money. And it all came about, because of research.

So for the purpose of planning far ahead for the entire nation, we hastily assert that numerical answers are not the way to go. What's needed throughout the discussion is to keep revenue and expenses relatively in balance. That means designing a workable monitoring system for the project, so we can notice when the two lines are diverging. At that point, either we cut our suit to fit our cloth, or else we economize on some non-medical expenses, in order to pay for our new-fangled health care. Over long periods with different diseases, up to research bat at unexpected times, it seems fairly certain we would have to adjust, first to the left, then to the right, then to the left once again. The analogy would be pointing a sailing ship toward a goal, shifting sails as the wind changes. If this is the way we must navigate, we stay on a course only if we abandon the goal of stating the time of arrival, because we can't predict the weather. But as long as we must wait for politics to tell us what the next step is, we can't even define the system of measurements. That's awkward, but it's essential. For a planner, it is asking for a license to speak as we please, leaving only irreversible decisions to Congress. I suggest we establish a monitoring system right away and create it with a lot of independence. The real goal is not so much to assist the system but to learn how to monitor it. Everyone is entitled to an opinion, but no one was entitled to his own facts.

Essentially in what follows, we exemplify four ways to generate more revenue for healthcare, and (unfortunately) two other ways to generate losses of revenue. Since that's relatively simple, the proposal is to learn more in the four positive directions if we need money or consider two ways to learn if revenue comes in too fast, unbalancing something. Please notice there is no provision for new transfers from the private sector.

Revenue Accounts.

Individual Escrow Accounts. There are three: all beginning at the onset of working life and depositing until age 65. (We do hope Congress will liberalize those limits.)

First escrow, proposed for retirement funding, starts to distribute funds at age 65, continuing to earn investment income after 65, assumed to be completely depleted at age 90.

The second and third escrows have yet to be described but are intended to pay for the final year of life, eventually including another one for the first year of a designated grandchild's life. Its deposits consist of transfers of Medicare payroll deductions, from age 20 to 65. Deposits stop at 65, but the balance continues to compound until the subscriber's death. Transfers to Medicare and the grandchild occur at that point, disbursing remaining balances in ways to be determined.

Mid-course Readjustments. Net Gains or Losses From Research, Investments or Special Circumstances. Assuming the National Institutes of Health continue to fund research at $33 billion per year, we can reasonably expect some reduction of treatment costs, net of the cost of the treatments. At the end of one year of their expected patent life, anticipated gains or losses should be transferred to either escrow account, preferably partially to both. This is an adjustment factor which may be some time in developing, and not immediately useful. Nevertheless, if we suddenly find a cure for cancer, for example, there must be an adjustment pocket, just in case the HSA as constructed does not provide for it.

Investment Income and Compound Interest. It must be obvious that investment gains will fluctuate, and there must be some short-term cash to manage long-term investments. We try to make realistic assumptions, so it is possible these revenues are maximums. This is a worst-case provision, in case developments are unexpected, and the accounts are somehow too rigid.

Disbursements.

Net Costs of New Treatments. It is common for new drugs and treatments to cost more than old ones, usually to pay off R&D costs in exchange for visibly improved treatment. After a few years, the sunk costs are paid off, and the net cost of treatment is reduced. However, in addition to this R&D write-off, some diseases are so rapidly fatal that the cost of keeping the patient alive must be called a net cost of the new treatment.

Net Reduction of Health Costs. In this example, it is assumed there will be scant financial gains to the public until the transition costs are mostly on a downward path. That's a political decision which may come out differently. However, it greatly simplifies the description to make the assumption that all temporary gains should remain unassigned until they seem permanent.

The Full Program in Operation. The overall assumption is that health costs will eventually mostly morph into retirement costs, except for the essential health costs at the beginning and end of life. Within that assumption is another, that health costs will continue to be low for young people, high for older ones, with decades of compound interest between the two. We also assume basic stability in the monetary system, with a positive interest curve, and equities outperforming debt instruments over the long haul. Although we are uncertified in these matters, we will make one monetary suggestion, in case of monetary turmoil. Finally, we have no idea how long it will take research to dig us out of our present difficulties, but congratulate the American public for taking the far-sighted gamble that funding research efforts can eventually rationalize the health system.

Transition Problems. By far the most difficult problem to solve is transitional and largely man-made. That is, by any set of reasonable assumptions, the interest income which could be generated by investing the cost at the beginning of life, could cut the costs in half at the end of life. Almost all of the problems in the way of doing that are created by adjusting to programs previously established by Congressional vote. That is, the solution is evident in the situation, except for the fact that no layman can wave aside existing laws. Consequently, the transitional costs must be paid by following existing law when a layman makes them, but if Congress made them Congress could wave away the barriers Congress had previously created. The consequence is that a layman must make convoluted, often self-defeating, transition proposals, whereas if Congress itself had made them, such objections might be swept aside.

Transition Gap. Since we propose to pay for the new system with income gathered on payroll deductions, there is an initial transition gap between the beginning and end of Medicare, for the early years of the new system. The duration of funding gap would be about twenty years, the length of time between the termination of payroll deductions (age 65) and the average age at death (presently 84). But the gap would actually diminish gradually over five years and eventually be extinguished by the arrival of available sources of funds for this transfer, since the last year is only a quarter of the Medicare budget.

What are the available sources of funding for this gap? Equity, defined as the judgment of Congress, should determine the apportionment between them. They are:

1. The generations, like my mother, who died at the age of 103, receiving benefits but never contributing to Medicare, because President Johnson was in a hurry to get started in 1965. Her whole generation is now dead, but her beneficiaries either inherited her generation's money or benefited from it. This portion in fairness is owed by my generation in the form of inheritance taxes.

2. The present recipients of Medicare, who imagine they will have paid for health costs of their last year of life in a prescribed way, through a combination of payroll withholding and premiums, but in fact would be receiving double benefits.

3. The currently working generation, whose payroll taxes for Medicare would be reduced by eliminating a quarter of their present assignment.

4. Children from birth to the time of beginning work, who will gradually be building up an escrow fund to pay for their terminal care. This last is probably just a bookkeeping rearrangement.

5. The Treasury, in the sense, or to the degree, that eliminating the deficit and its borrowing costs is part of the outcome. In other words, everybody, in varying degrees, should contribute because everyone would benefit. The benefits flow in at different times and rates. Whether to chop them up into pieces or to smudge them into the existing tax system is a matter Congress will decide, no matter what we suggest. Nevertheless, we start the discussion with a suggested plan, recognizing many plans might be feasible.

In the problem at hand, about a quarter of Medicare costs appear in the last year of life. If a mechanism could be constructed to deposit such a sum at interest the day the person is born, a normal interest rate would have paid this off by the time a person was about twenty-five or thirty years old. That is, there is plenty of money in the system to do it, except children seldom have much money. This paradox will be addressed in discussing transition problems. However, to confront newborns with a collective fee of fifty billion dollars is nonsense, particularly when the beneficiaries of this gift would already be dead, and would have contributed nothing to its cost. Yet this is not too different from what Lyndon Johnson did with the transition costs of starting Medicare in 1965. Using this example, we are about to propose a method of accomplishing this transfer within existing law, which Congress could easily improve on if it chose.

That would be to consolidate the first and last years of life into a single person and suggest a pump-priming federal gift of $450 to pay for both. At 6.5% tax-free compounded quarterly, this should create an escrow fund containing $101,000 upon death at an average age of 84. Since there would be no birth costs for existing Medicare recipients, the subsidy would be reduced to $300 for them (generating a minimum of $67,500), but paid back out of surplus as surplus begins to be generated, and disappearing when it is repaid. If necessary, their Medicare premiums could be reduced in the meantime. The great bulk of escrow contributions would be provided by transferring payroll deductions to the HRSA. It is not contemplated that payroll contributions would be reduced until foreign borrowing stopped. By this approach, almost all participants would benefit. Congress might improve on this system if it chose. The goal is to start with first and last years, gradually extending both until contributions become unnecessary. That might easily take fifty years to complete, and would imply net cost reductions by research in the meantime.

Let's restate the essential dilemma: the average taxpayer meets a banker's definition of a good client. He has excellent future earning prospects, but he doesn't have the ready cash to take advantage of it. To put it another way, the average HSA depositor will have gobs of money when he dies, but right now he's short of cash. Somehow, we must find ways to fund the first few years, when people are steadily dying, but the new depositors haven't generated enough investment income in their accounts, to pay for it. They face the problem of paying payroll withholding taxes throughout their working years, and Medicare premiums for twenty more years on Medicare, before they eventually benefit from last-year of life reinsurance. We propose to offer these young people a trade: pay us your own last-year costs in return for skipping a portion of Medicare payroll deductions and/or Medicare premiums. A straight trade would amount to paying about $10,000 right now, in return for not paying up to about $40,000, later. That's a guess, of course, and the number of takers would vary each year, so it implies an annual auction to set the price. As the years' progress, the amount the government would need will slowly diminish to zero, net of inflation, and the auction is over. Perhaps it would be easier to wholesale the total to a broker and leave the auction to him. The details of this sliding scale could become quite complicated, and all the government wants is a loan. Over time, the price of this auction might evolve into a useful number in the estimation of net medical inflation, for other purposes.

Proposed Transition Scheme.After the defined-term HRSA has a few minor adjustments, and after a couple of years of study and discussion, another proposed first step would be to start up the escrow funds which would fund a Terminal Care proposal, called Last year of Life Insurance. The actuarial process is essentially the same as life insurance, and the life insurance industry probably has useful experience to draw on. Medicare can readily supply the data on actual cost experience, and current payments would be very close to next year's cost. Over time, costs might migrate, so the continued existence of Medicare is essential to this program, which should be reassuring to conservative subscribers, who fear we will propose closing Medicare. No, we propose phasing it into additional Social Security funding, at the speed which research makes possible. It is intended that Medicare payroll deductions will fund the transfer of average national last-year costs to Medicare, allowing them to reduce Medicare premiums for current subscribers. In fact, if the payment system got tangled, payroll withholding might have to be temporarily increased, to pay for costs created before the research findings.

However, there is on average a twenty-year gap between the termination of payroll deductions (the onset of Medicare) and the age at death of subscribers, so this transitional cost must somehow be re-arranged. However, the overall revenue to fund the last year would come from payroll deductions, which is desirable for the entire program from start to finish, if it can be managed. The alternative plan is to transfer the entire proceeds of the payroll tax to the individual's escrow account as it is collected, eventually supplying considerably more revenue than is needed, because of the generation of compound interest. It might be necessary to delay the onset of death payments a year or two, but eventually the gap will be filled, then it might be exceeded, but eventually, the program will be able to address the second-to-last year, or even more. Funding the transition is the central issue in the discussion, and the public has a right to decide how they would like to fund it.

Additionally alternative for transitional costs, the program could draw on the first year-of-life program for its surplus funding, because everybody now alive has somehow already funded the cost of having been born. Furthermore, including newborns would add 20+ years to the interest compounding for combined newborn-and-elderly pay-back. The problem is only one of math, there should be plenty of money in the proposal once it gets started.

Elimination of Existing Programs. The grand scheme is to use the compound income to eliminate the tax cost supporting existing government programs, substituting an accordion-like elimination process which begins at birth, ends at death, and is supplemented only in the middle. Gradually, it is envisioned that working people could stop directly subsidizing other age groups' health costs before and after their working years. As investment funds come in, and medical expenses decline, some of their retirement costs could be covered, as well. Since age-transferred costs would be supported by non-escrowed investment accounts. It may take a long time to get to that goal, but national morale should be improved by understanding there is a goal, and a workable plan to get there. By "workable" is meant you may pay your own costs at a different age, not subsidize some strangers who happen to be of different age. And definitely not to borrow any deficits from foreigners.

Let's summarize: The last year of life re-insurance proposal will aim us in a better direction, getting more parallel to where medical care is taking us, and eventually save a great deal of money. It's a most significant problem is funding the transition to it, and we suggest several methods of accomplishing it.

Those who feel affection for government guarantees should be heartened to learn this plan provides for the probability we may not actually reach that goal in their lifetimes. Thirty million Americans were excluded from the Affordable Care Act, which sincerely hoped to cover everyone. However, the realities of seven million prison inmates, eight million mentally handicapped, and twelve million undocumented aliens proved to be too much for that goal. The ACA should have served to convince almost everyone that a very sizeable population subgroup has such specialized needs that specifically targeted programs might well be a better approach for them. And so, it is only realistic for this proposal to allow for the possibility that Medicare, the CHIP program, and Medicaid may never be completely closed, even though they were never completely suitable for more typical Americans.

The reader may have noticed we have omitted one significant group, those from birth to age 25. It has special problems, addressed in the next section.

Originally published: Monday, April 25, 2016; most-recently modified: Tuesday, May 21, 2019